In the final two chapters of "One Up on Wall Street," Peter Lynch reviews several contentious securities and summarizes his knowledge and experience. These ideas allowed him to generate average returns of more than 29% per year while growing the Fidelity Magellan Fund from practically nothing to some $9 billion in assets over 11 years.
Beware options, futures and shorts
Lynch’s sentiments on these securities were clear: don’t buy or trade them unless you are a professional. He reported he had never used any of them and didn’t expect to use them in the future. His thoughts parallel those of Benjamin Graham in “The Intelligent Investor,” which I reviewed recently.
What he learned from his investing experiences
For much of chapter 20, Lynch reviews the ups and downs, the trends and countertrends as well as lessons learned between about 1960 and 1988, the year he published "One Up on Wall Street." Some of that history now seems somewhat dated, given the events of the 30 years since then. Still, he drew 26 lessons from those events and trends that remain relevant and profitable today:
- The market will decline sharply at some time in the next few years (no matter what year you’re in).
- These are good times for investors, since they make outstanding stocks available at bargain prices.
- Attempts to predict these declines and rebounds are impossible.
- But you can succeed since you don’t have to be correct all the time or even most of the time.
- The biggest winners came as surprises to him, and they took years to do that.
- Expect different risks and rewards from different stock categories.
- Excellent results can be achieved through compounding 20% to 30% gains in stalwarts.
- In the short term, prices may move in different directions than the fundamentals, but in the long term, profits will prevail.
- Even though a company is doing poorly, it doesn’t mean it can’t do worse.
- You’re not necessarily right if the price goes up.
- Similarly, you’re not necessarily wrong if the price goes down.
- Think “overpriced” when you see a stalwart with lots of institutional ownership and Wall Street coverage.
- You will lose if you buy a mediocre stock because it is cheap.
- Don’t sell an “outstanding fast grower” because it seems slightly overvalued.
- “Companies don’t grow for no reason” and do not expect fast growers to keep growing at the current rate.
- You do not lose if you miss a successful stock, even a 10-bagger.
- “A stock does not know that you own it.”
- Avoid attachment to a stock and complacency; even keep monitoring the winners.
- You lose everything you invested if a stock goes to zero—no matter how much you paid for it.
- Prune and rotate, according to the fundamentals, to improve your results.
- When something favorable about your stocks shows up, add to your stake; the opposite holds for bad new news.
- “You won’t improve results by pulling out the flowers and watering the weeds.”
- Buy a mutual fund if you don’t think you can beat the market to avoid extra work and money.
- It is universally true that there’s always something to concern you.
- Maintain an open mind so you can learn new ideas.
- “You don’t have to 'kiss all the girls.' I’ve missed my share of 10-baggers and it hasn’t kept me from beating the market.”
As for the title of chapter 20, “50,000 Frenchmen Can Be Wrong,” it may have been a twist on a Broadway play and song from the 1920s, “Fifty Million Frenchmen Can’t Be Wrong,” a risqué romp featuring Sophie Tucker.
Lynch used the phrase this way in the book:
“I’ve been hearing that the era of professional management has brought new sophistication, prudence, and intelligence to the stock market. There are 50,000 stockpickers who dominate the show, and like the 50,000 Frenchmen, they can’t possibly be wrong.
From where I sit, I’d say that the 50,000 stockpickers are usually right, but only for the last 20 percent of a typical stock move. It’s that last 20 percent that Wall Street studies for, clamors for, and then lines up for—all the while with a sharp eye on the exits.”
Conclusion
Lynch’s "One Up on Wall Street" has become a classic among investors, and justifiably so. He was able to both educate and entertain his readers at the same time, while writing in layperson’s language. It is easy to read and frequently humorous as Lynch takes aim at the follies of investing as well as his own misses.
The book brought forward the game-changing idea that almost everyone who seeks to invest can find edges, whether that is working in a cyclical industry or spotting highly successful consumer goods. What matters is that you have a deeper appreciation of the possibilities of a potential investment.
Value investors will agree with Lynch that a bit of insider or product knowledge is not enough by itself; instead, every potential investment must be subject to due diligence through fundamental analysis. The same holds for selling: make your decisions based on fundamental changes, not someone else's folklore.
All in all, this classic is still excellent reading and a valuable tool for investors. I recommend it.
Peter Lynch screen
GuruFocus provides the Peter Lynch Screen tool for quickly finding companies that meet his criteria. Members can access the screener here, and non-members can get started here.
(This review is based on the Millennium Edition (2000) of “One Up on Wall Street.” More chapter-by-chapter reviews can be found here.)
